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Housing Most Affordable Since 1996

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From the Telegraph

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Housing affordability at the highest level since 1996

Housing has become more affordable than at any point in the past 13 years, according to new research which will raise hopes that the property slump could soon come to an end.

By Edmund Conway

Published: 9:16PM BST 16 Aug 2009

Houses are at their most undervalued since the tail-end of the last housing slump in the 1990s, according to a key statistical indicator. The Lombard Street Research/Daily Telegraph housing affordability index shot deep into "affordable" territory in the first three months of the year – indicating that for homeowners who can get hold of credit now is a good moment to buy a house or trade up.

Although the figures may elicit some surprise, given that property slumps tend to last for some years, Lombard Street Research (LSR) said that this did not mean prices would be catapulted higher in future months. The indicator, in which 100 points represents the average affordability level since the early-1960s and a higher figure means prices are undervalued, rose from 108.4 points to 118 in the first quarter of 2009. This is the highest level since 1996 – at which point the housing market was starting to pick up in earnest following the crash earlier that decade. Although the results are slightly historical, they help explain the recent unexpected pick-up in the market.

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The improvement is far more swift than in the previous slump, although Melissa Kidd of LSR pointed out that the initial falls in house prices were similarly abrupt this time around.

"This could lend weight to the theory that the housing slump could be shorter-lived than on previous occasions," she said. "Indeed, the Nationwide house price index has risen in four out of the past five months, and we expect that prices should be flat as a whole this year.

"However, we don't expect the recovery to be very swift. We're expecting low single-digit growth in 2010 for two reasons: credit conditions, and also there's a group of people who found it very easy to get high loan-to-value mortgages pre-2008 who simply can't do so anymore."

The Royal Institution of Chartered Surveyors said recently that it was throwing out its previous forecast that house prices would fall by 15pc this year, instead indicating that they were likely to rise slightly. The Council of Mortgage Lenders reported last week that the number of homes being repossessed had fallen in the second quarter of the year.

The affordability index is unique because it compares the average family's disposable income with the cost of the average mortgage, focusing in on the capacity of households to pay. The index has been boosted by the sharp cut in interest rates since last year.

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From the Telegraph

Linky

I love the affordability case, when we have negative interest rate we shall all be able to afford mansions. :rolleyes:

Edited by Confounded

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Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha!

Ha ha! :lol::lol::lol:

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Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha!

Ha ha! :lol::lol::lol:

When we have negative interest rates we can afford to buy the universe with a dime!

What we have is houses that pose the highest risk to capital for first time buyers since 1988.

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Guest The Relaxation Suite
From the Telegraph

Linky

Do they think that by telling us stuff like this over and over and over and over again we are just going to believe it?

Houses needed to drop something like 40% from peak to become affordable. They have dropped less than half of that. Houses are no way near affordable.

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Do they mean "relatively" affordable. I.e., more affordable than before?

If you scrape away the bovine excreta "affordable" is objectively ascertained: 2.5 to 3 X average income.

The prices have a looooooooooooooooooooooooooooooong way to go before they are affordable.

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Do they think that by telling us stuff like this over and over and over and over again we are just going to believe it?

Quite possibly.

Historically, the method has been amazingly successful.

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When we have negative interest rates we can afford to buy the universe with a dime!

What we have is houses that pose the highest risk to capital for first time buyers since 1988.

nonsense.

we can all buy the entire universe and GET PAID to put your feet up.

you just need the face of skeletor and no need to eat or drink, or indeed, stay alive.

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Guest The Relaxation Suite
Quite possibly.

Historically, the method has been amazingly successful.

LOL - take your point, Herr Goebbels.

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"Houses are at their most undervalued since the tail-end of the last housing slump in the 1990s"

If a house is 'undervalued' surely this means that the selling price is less than the build price? Where are these houses? I want one!

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Deeply flawed indeed.

I distinctly remember an article from Lombard last property collapse calling for a huge rise about 1990. Seems like they get trundled out every time.

http://firstrung.co.uk/articles.asp?pageid...&cat=44-0-0

What The Experts Say

House price affordability at lowest level since 1991 - Lombard Street Research

Lombard Street Research compile a quarterly report on UK house prices. Despite their affordability index being at its worse position since 1991 (the last recognised 'epicentre' of a reported house price crash) LSR feel justified in predicting only a modest house price correction of 3-4% in 2008. Thereafter LSR suggest only a 5% correction is needed to put property 'back on track' in terms of affordability.

LSR base this theory on interest rates needing to increase to 8.5% in order to mirror the severe affordability problems which existed in 1991.

However, this does not take into consideration that (according to the CML) mortgage payments, as a percentage of take home pay, are currently as high as in 1991; not withstanding the fact that all other household expenses have risen sharply - vis a vis a direct comparison with 1991. With that in mind we'd respectfully suggest that the LSR research is compromised and therefore deeply flawed...

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Deeply flawed indeed.

I distinctly remember an article from Lombard last property collapse calling for a huge rise about 1990. Seems like they get trundled out every time.

http://firstrung.co.uk/articles.asp?pageid...&cat=44-0-0

What The Experts Say

House price affordability at lowest level since 1991 - Lombard Street Research

Lombard Street Research compile a quarterly report on UK house prices. Despite their affordability index being at its worse position since 1991 (the last recognised 'epicentre' of a reported house price crash) LSR feel justified in predicting only a modest house price correction of 3-4% in 2008. Thereafter LSR suggest only a 5% correction is needed to put property 'back on track' in terms of affordability.

LSR base this theory on interest rates needing to increase to 8.5% in order to mirror the severe affordability problems which existed in 1991.

However, this does not take into consideration that (according to the CML) mortgage payments, as a percentage of take home pay, are currently as high as in 1991; not withstanding the fact that all other household expenses have risen sharply - vis a vis a direct comparison with 1991. With that in mind we'd respectfully suggest that the LSR research is compromised and therefore deeply flawed...

Have they taken into account tax rises, government spending cuts when looking at affordability??

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From the Telegraph

Linky

I bought a spacious 2 reception room, 3 bed flat in zone 3, near tube station NW London in 1997 for £110k. At the peak it sold again for £320k.

We bought it as FTB both on good graduate starter salaries - of around £18k-20k each. Interest rates were around 7%. We were lucky enough to have a 25% deposit from our parents - around £30k. Similar current graduate starting salaries are around £26k-£28k.

I can't remember exactly what we paid each month, but it seems obvious that prices would have to fall much much further to make such a flat affordable and on a current valuation of say £285k, a £30k deposit wouldn't be as helpful.

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"Affordability" in this research usually means first month interest payments (ignoring all those one-off costs you get every two or three years with a new mortgage deal).

I prefer to think of affordability as the total costs in real terms over the lifetime of the mortgage.

Funnily enough, it's proportional to the price of the house.

Oh well, not quite affordable yet.

VMR.

Edited by VeryMeanReversion

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I love the affordability case, when we have negative interest rate we shall all be able to afford mansions. :rolleyes:

I bid £1 billion for your three-bed semi. It's affordable at 0%.

No, wait, I can do better. I bid £2 billion for that rather nice house up the road. Sorry mate.

Oh all right, the semi will do as a BTL, I suppose.

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That has to be the biggest load of BS I have read in a long time. Affordability is low because of low interest rates that will sooner or later go up.

You only buy now if you can easily afford the repayments based on 5-6% although they could also go a lot higher than this.

The choice is simple if you cannot pay back a mortgage at 6% along with increased taxes to pay for bank bailouts then you should not buy.

If you do you risk repossession

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I bid £1 billion for your three-bed semi. It's affordable at 0%.

No, wait, I can do better. I bid £2 billion for that rather nice house up the road. Sorry mate.

Oh all right, the semi will do as a BTL, I suppose.

That will be an interest only mortgage will it Sir? Very good, Sir. Very wise.

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Proof of the pudding is in the eating.

Don't you lot look at the indices?

It's obviously Time2Buy.

:D

The username SqueakyBumTime would better suit you ;):lol:

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I had a quick look at their site. What a crock of shit.

It naturally assumes: (1) 100% mortgages [despite the fact that we're constantly being told that swarms of, ahem, 'cash rich' buyers are currently single handedly driving the housing recovereh]; and (2) that today's interest rate will continue for the next 25 years.

I wonder what interest rate it assumes someone wanting a 100% mortgage can get.

Edited by the flying pig

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A couple of points about affordability from the "South East" thread:

This is pretty much what I've been saying for the last 4 years.

Everybody thought houses were affordable becuase the repayments were in line with historical averages. What they forgot was that with inflation at 8% you were paying off 10% of the loan each year. With inflation at 2% you're only paying off 4% each year.

The difference between the two means that after 5 years you've paid off 20% of the loan rather than 50%, which is what you need to move up the ladder. So rather than being able to move after 5 years you need to wait 12 years.

Another way of looking at this is that to repay the loan at the same rate would meaning upping your repayment from a manageable 40% of net income to a clearly impossible 70%.

(NB: The figures are illustrative rather than absolutely correct)

Completely agree.

The "affordability" described in the press (including headlines today) is a sham. It is only 1st year cashflow. This is fine if you're an investor, but not if you're a homeowner. People who buy today, driven by advice in the press today that affordability is better than any time since 1996, will find that it isn't. It's a lie. First year cashflow is better, not loan affordability. You're not just signing up to make the 1st year payments, you have to make them all. Because there is next to no inflation the loan payments stay a high percentage of income for much, much longer. So the 1st year might feel the same as 1996, but by the 3rd year you're paying more than ever before. Never mind if interest rates go up. And so on through the 4th, 5th - 25th year payments - all record percentages of their pay.

This is the most important thing that you need to know about the housing market. The banks know it - that's how they valued all those securities. Your payments are their profits. And it bakes deflation into the pie. Yet NO ONE talks about it. It's simple. More money spent on mortgage payments = less on holidays, fewer plasma screens, & lower wealth all round. Easy as.

And it's not only that. How many normals know about loan amortisation? They all think they'll "pay off their loans and trade up" not realising that you only pay off 10% of a 25 year repayment loan in the first 5 years, not 20%. The repayments are all interest up front as the banks want their money sharp to stop it's value decreasing.

Inflation was THE story about the house market. Today we apply a high inflation strategy to a low inflation world. The result - Epic Fail.

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Do they add hedonics to this or something?

Recessed ceiling lights: worth £10000 (per room)

Laminate flooring: worth £5000 (per room)

Heated towel rail: £3000 (per rail)

Outdoor hot tub: worth £20000

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